SEC introduces crowdfunding compliance and disclosure interpretations

The Securities and Exchange Commission (SEC) has released new Compliance and Disclosure Interpretations (CDIs)1 regarding the intrastate offering exemption in Section 3(a)(11) of the Securities Act of 1933

Today, crowdfunding — using startups like Kickstarter to source funds for virtually any project — is moving to equity investments under the radar of U.S. regulators. These new compliance and disclosure interpretations (CDIs) will be important to the interpretation of state crowdfunding rules, including the Wisconsin crowdfunding law that was enacted late last year.

In November, the Wisconsin legislature passed legislation enabling businesses to raise money through equity crowdfunding and is expected to become effective on June 1, according to the National Law Review. A key aspect of the Wisconsin crowdfunding law is that the issuer and investors must be resident of Wisconsin.

Since the passage of the Wisconsin law, it has been unclear how intrastate crowdfunding offerings can legally be advertised. While general advertising is not prohibited by the Intrastate Exemption, general advertising would need to comply with the requirement that offers be made only to state residents.

The National Law Review reported that the new CDIs reveal the Securities and Exchange Commission (SEC)’s stance regarding the use of Internet crowdfunding portals and the use of websites and social media in connection with intrastate crowdfunding offerings. They reiterate that general advertising is permissible under the Intrastate Exemption, so long as the advertising complies with the requirement that offers can only be made only to persons resident within the issuer’s home state.

Further, the CDIs clarify that an Internet crowdfunding portal of the type contemplated by the Wisconsin crowdfunding rules is allowable under the Intrastate Exemption, however, the portal must implement adequate measures so that offers of securities are made only to residents of Wisconsin. According to the SEC, in the context of an offering conducted in accordance with state crowdfunding requirements, including disclaimers making it clear that the offering is limited to residents of the relevant state under applicable law, and limiting access to information about investment opportunities to people who confirm they are residents of the relevant state.

The use of an issuer’s website or social media presence to offer securities in a Wisconsin crowdfunding offering is not permissible under the Intrastate Exemption. While an issuer can still use the Web to advertise its market presence broadly, an issuer participating in an intrastate equity crowdfunding offering must be careful not to make an offer of securities through online media. For instance, referring to the offering of securities on the issuer’s website or through the issuer’s Twitter or LinkedIn account would result in the loss of the Intrastate Exemption.

Any issuer that is interested in conducting an equity crowdfunding offering in Wisconsin will need to use caution to ensure that it is complying with both the requirements of the Intrastate Exemption federal and state law. Although the CDIs do help clarify the requirements of the Intrastate Exception, compliance issues remain.